Homer Alaska - Business

Story last updated at
3:38 PM on
Wednesday, July 20, 2011

Lawmakers like gas pipeline report, but questions beginning to emerge

By Tim Bradner
Morris News Service-Alaska

State legislators are giving good marks, so far, for a state-sponsored study of a possible 24-inch natural gas pipeline built from the North Slope, but questions are beginning to emerge. A 737-mile pipeline would cost $7.52 billion in 2011 dollars, the study concluded, and could deliver gas to Interior and Southcentral Alaska by 2019.

State Sen. Joe Thomas, D-Fairbanks, said he supports the state taking the initiative in building a pipeline if a planned 48-inch pipeline to Canada is delayed, but he worries that the report by the state's Alaska Gasline Development Corp. released July 5 is too narrowly focused.

More consideration could be paid to a larger-diameter pipe on the northern end, for example, that could aid in a larger pipeline built eventually to Canada or to a liquefied natural gas project in Valdez. Also, the state should be pursuing market possibilities in Asia more aggressively.

"There are huge LNG deals being done in Asia, and Argentina is even looking at imports of LNG. We should be in this game," Thomas said.

Thomas also said he is concerned that if other state initiatives to encourage exploration in Cook Inlet, such as generous tax credits that pay most of the costs of new exploration wells, result in substantial gas discoveries, this would take the wind out of the sails for an in-state gas pipeline.

Sen. Tom Wagoner, R-Kenai, has the opposite concern. He is worried that the possibility of a state-financed gas pipeline that also could include a state subsidy, could impair Cook Inlet exploration. The pace of exploration drilling in the inlet is picking up, with the encouragement of the tax credits, and the threat of a state-funded pipeline could chill new investments, Wagoner said.

While the exploration interest in the inlet also is driven by the prospects for oil, which is now selling for high prices, the decline of the region's producing natural gas fields is creating a new market for drillers. New studies by the U.S. Geological Survey and the state Division of Oil and Gas indicate potential for substantial new Cook Inlet gas discoveries.

Explorers are already finding new gas in the region.

"Buccaneer's Kenai No. 1 well exceeded expectations, and they just completed an equity-raising effort to bring the well into production by the end of the year, and will also use those funds to drill and complete a Kenai Loop-2 well, scheduled to be spudded this quarter," Wagoner said in a statement released July 5.

Like Thomas, Wagoner said the state should be considering other alternatives including a larger-diameter segment built from the North Slope to Fairbanks or the state investing equity in a large pipeline to Canada to encourage TransCanada Corp. and ExxonMobil Corp. with that project, or in a large-diameter pipeline to an LNG project in Valdez. Larry Persily, the federal gas pipeline coordinator and also an Alaskan, also has suggested that the state consider a partnership with major companies in the large pipeline rather than spending money for a smaller in-state pipeline.

Rep. Steve Thompson, R-Fairbanks, has a more local concern about the AGDC study. He wants to know why the price for gas delivered to Fairbanks will be higher than it would be for gas delivered to Anchorage, another 400 miles south of the Interior city. Energy costs have become a major impediment for the local economy in Fairbanks, where electricity prices are now 23 cents a kilowatt hour compared with 10 cents to 13 cents a kilowatt hour in some parts of Southcentral Alaska.

Power is generated mostly with expensive fuel oil by Golden Valley Electric Association in Fairbanks, while Chugach Electric Association and Municipal Light and Power in the Anchorage area fire power generation turbines with less expensive gas.

Thompson said he also is concerned about who an industrial "anchor customer" for the 24-inch pipeline might be. The study said a liquefied natural gas export project has the best prospects, but nailing this down is critical to the feasibility of the entire project because utility customers can't afford to pay for the pipeline on their own absent a massive state subsidy.

Among Democrats in the state House, Rep. Les Gara, D-Anchorage, said he is concerned about the political bandwagon developing behind the in-state gas project, which would push utilities into signing long-term contracts before enough time is given to the other, larger pipeline projects that could bring gas to Fairbanks and Southcentral for less cost.

"Those pushing the project want you to think the lights will go out tomorrow if you don't do what they propose. It's bad policy to scare people into ill-advised projects," Gara said in a newsletter to his constituents in Anchorage's House District 23. "No one builds a gas pipeline without a 20- to 30-year commitment," from customers, Gara wrote.

He acknowledged the in-state gas line may wind up being the only realistic option to ward off a regional gas shortage, "but now is not the time to sign onto that project," Gara wrote.

There are still possibilities for better options that could produce state revenue as well as provide gas for less cost, he wrote.

What makes the in-state pipeline proposed by ADGC less efficient is the restriction in the study that gas supplies would be limited to 500 million cubic feet per day, which is what the state has agreed to in its Alaska Gasline Development Corp. contract with TransCanada Corp.

Dan Fauske, president of the AGDC, told legislators in a briefing July 5 that additional supplies could be sent through the 24-inch line with additional compression. However, Fauske said the corporation did not include analyses of larger-diameter piping, which would be more efficient if larger volumes were shipped, because of the restriction agreed to in the AGIA contract.

There is criticism that the 500 million cubic feet per day restriction may have limited the AGDC's analysis of potential industrial customers for gas, particularly projects that would manufacture products with natural gas liquids or make high-quality liquid fuels with methane, both of which need larger volumes of gas delivered at less cost than was contemplated in the AGDC study.

Meanwhile, the prospect of an in-state gas line delivering North Slope gas by 2019 won't dampen the drive by utilities in the region to import liquefied natural gas to meet gas shortages that could occur in 2014, said Jim Posey, general manager for Anchorage's city-owned Municipal Light and Power. ML&P is working with Chugach Electric, Matanuska Electric Association and Homer Electric Association on a plan to purchase imported LNG as a stop-gap.

"What are we going to do in 2014? Let people freeze? We have no other option to ensure we will have the supply," Posey said.

Exploration in Cook Inlet would help, but Posey doesn't see drillers being able to find and produce enough gas by the time it will be needed.

"We have studies (by PetroTechnical Resources of Alaska) that show a need to be drilling 18 new gas wells a year, and we don't have that," Posey said.

Posey wouldn't comment on a major conclusion of the AGDC study that gas can be delivered from the North Slope through a 24-inch pipeline for about half the cost of imported LNG.

"We're in negotiations with potential suppliers of LNG and those are confidential. But for the short-term, LNG won't be cheap," he said.

However, the uncertainty of whether a 24-inch line will be built could affect negotiations with LNG suppliers. Posey said potential suppliers would like a long-term contract for LNG sales. "What LNG supplier will sign on for the short-term?" he said.

Nailing down more definitive cost estimates for a 24-inch pipeline for a final decision by the state will take another $350 million or so spent for engineering and more detailed study, and Thomas, who is a member of the Senate Finance Committee, said he will support the expenditure.

"It would be very short-sighted for us to not do this work for the sake of a few hundred million dollars, saying 'let's leave it to the private sector,'" because the timing is too urgent, Thomas said.

The Legislature approved a set-aside of $200 million for the project in the state's Fiscal 2012 capital budget.

Tim Bradner is a reporter for the Alaska Journal of Commerce in Anchorage.